Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/316906 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11792
Publisher: 
CESifo GmbH, Munich
Abstract: 
Earnings uncertainty is central to most heterogeneous-household models. Yet, there is surprisingly little evidence on how subjective uncertainty is related to consumption behavior. Using unique data from the Survey of Consumer Expectations, we show that the marginal propensity to consume (MPC) is increasing and concave in individual specific earnings growth uncertainty. In the workhorse consumption–savings model, augmented with risk heterogeneity, MPCs decline with earnings uncertainty, contrary to the empirical evidence. We pinpoint which mechanisms, central to the model, create this disconnect and show how recently proposed deviations from the full-information rational expectations framework can reconcile theory with the empirical findings.
Subjects: 
marginal propensity to consume
consumption
subjective uncertainty
heterogeneity.
JEL: 
D12
D84
E21
Document Type: 
Working Paper
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